BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
ALEX PADILLA, CHAIR
SB 1441 - Leno Hearing Date:
April 20, 2010 S
As Amended: April 13, 2010 FISCAL B
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DESCRIPTION
Current law defines a public utility to include every common
carrier, toll bridge corporation, pipeline corporation, gas
corporation, electrical corporation, telephone corporation,
telegraph corporation, water corporation, sewer system
corporation, and heat corporation, where the service is
performed for, or the commodity is delivered to, the public or
any portion thereof.
Current law authorizes the California Public Utilities
Commission (CPUC) to exercise limited jurisdiction over the
holding company of a utility in order to protect the public
interest and ensure that the utility subsidiary is providing
adequate service at just and reasonable rates.
This bill would prohibit a public utility from transferring
moneys to its holding company unless approved by a two-thirds
vote of the public utility's ratepayers.
BACKGROUND
CPUC Jurisdiction over Holding Companies - A public utility
subject to CPUC regulation is not required to be organized in
any particular manner, but many are structured as a wholly owned
subsidiary of a holding company that owns the stock of the
regulated utility, with unregulated operations in other separate
subsidiaries or affiliates. A holding company of a utility is
not itself a public utility subject to CPUC jurisdiction.
However, the CPUC's duty to regulate utilities in the public
interest includes ensuring that ratepayers do not subsidize a
utility's unregulated operations.
The CPUC has statutory authority to inspect accounts and records
of a utility's holding company. Affiliate transaction rules
govern a utility's business dealings with its holding company
and other affiliates, including, for example, utility payments
to its holding company for providing administrative services.
In utility rate proceedings, the CPUC and the Division of
Ratepayer Advocates scrutinize a utility's affiliate
transactions for cross-subsidization and preferential treatment
of affiliates in competitive markets.
In addition, a public utility is required to obtain CPUC
approval of any merger or transfer of control of utility assets,
including reorganization under a holding company. In the
mid-1980s, when several electric and gas utilities applied for
approval to reorganize under holding companies, the CPUC granted
approval with conditions, including the requirement that the
holding companies make the capital requirements of the utilities
the first priority before spending profit for other purposes. A
court upheld these holding company decisions and the CPUC's
imposition of conditions as a lawful exercise of its authority
to protect the public interest and guard against ratepayers
subsidizing a utility's unregulated lines of business.
Federal Law - Concern about ratepayer harm from utility holding
companies dating back to the Great Depression led Congress to
enact the Public Utility Holding Company Act of 1935 (PUHCA).
Potential harms cited were parent holding companies requiring
unreasonable fees from their utility subsidiaries, giving
affiliates preferential treatment, and otherwise adversely
affecting the accounting practices and the rate and dividend
policies of the utility subsidiaries. The Energy Policy Act of
2005 repealed PUHCA and revised federal oversight of utility
holding companies. The CPUC reviewed the impact of this
weakened federal law and found its own oversight of utility
holding companies to now be even more important to protect the
public interest.
Utility Profit - The CPUC is required to ensure that a public
utility's rates are just and reasonable. Rates are to be set in
an amount that will cover the utility's costs of providing
service and maintaining facilities and provide the utility a
profit, or rate of return. This rate of return is considered to
be the compensation paid to investors for the capital they have
provided for public utility service. The general standard is
that a utility's rate of return should be reasonably sufficient
to assure confidence in the financial soundness of the utility
and should be adequate, under efficient and economic management,
to maintain and support its credit and enable it to raise the
money necessary for the proper discharge of its public duties.
COMMENTS
1) Author's Purpose . According to the author, current law
does not give ratepayers a voice in whether the portion of
their rate payment that becomes the utility's profit ends
up with the utility's holding company, which deprives them
of any direct or indirect authority over how those dollars
are used. The author states that this bill would require
that ratepayers have the final say if and when a utility
may transfer funds to its holding company, transfers that
involve billions of dollars annually. Requiring this vote
would ensure that the holding company is responsive to the
people from whom it earns its profits - the ratepayers -
and that company actions get the public discussion they
deserve, the author claims.
2) Public Utilities Affected . The CPUC has jurisdiction
over "public utilities," defined to include any common
carrier, toll bridge corporation, pipeline corporation, gas
corporation, electrical corporation, telephone corporation,
telegraph corporation, water corporation, sewer system
corporation, and heat corporation, where the service is
performed for, or the commodity is delivered to, the
public. This bill would apply only to public utilities with
a holding company for the purpose of requiring ratepayer
approval of how a utility spends its profit. Any public
utility without a holding company could continue to decide
how to spend profit without ratepayer approval.
3) Ratepayer Approval Process . This bill would require a
two-thirds vote of ratepayers for a utility to pay or
transfer moneys to its holding company, but it does not
specify how this ratepayer vote should occur. Is the
utility required to incur the cost of mailing a ballot of
all ratepayers on a monthly or annual basis whenever funds
are transferred, including funds for affiliate transactions
approved in a rate proceeding? Is a separate vote required
for each budget line item designating payments to a holding
company and for each dividend issued? If a ballot is
mailed with a utility bill but only half of ratepayers
respond, is two-thirds of respondents sufficient, or
two-thirds of all current ratepayers? What role does the
CPUC play in connection with this vote requirement?
4) Private Ownership of Utilities . Except as required to
protect the public interest, the CPUC generally does not
interfere with the ownership and management decisions of
privately owned utilities. As stated by the CPUC in one of
the holding company decisions: "Insofar as is consistent
with the public interest, we prefer to leave management of
the utility to the managers chosen by the utility's
shareholders. Otherwise, private ownership of public
utilities would be pointless." This bill, by giving
ratepayers the right of final approval of any utility
payment to its holding company, would significantly
interfere with shareholder and management decisions as to
disposition of utility profits.
5) "Taking" Issue . The requirement that utility rates be
just and reasonable aims to ensure that ratepayers do not
pay excessive rates and also to ensure that rates cover a
utility's costs and provide a rate of return, or profit.
Rates that are too low can be considered "confiscatory" and
result in an unlawful taking of private property. The
Fifth Amendment to the United States Constitution,
applicable to the states through the Fourteenth Amendment,
provides that private property shall not be taken for
public use without just compensation. Factors a court
considers when determining whether utility rates or other
economic regulations result in an unlawful taking include
whether the company is able to operate successfully,
maintain its financial integrity, attract capital, and
compensate investors for the risks assumed. This bill, by
allowing a utility to transfer profit to its holding
company only with approval of two-thirds of ratepayers, may
result in an unlawful taking.
POSITIONS
Sponsor:
Author
Support:
None on file.
Oppose:
California American Water
California Independent Telephone Companies
California Water Association
California Water Service Company
Pacific Gas & Electric
Southern California Edison
SureWest Communications
Jacqueline Kinney
SB 1441 Analysis
Hearing Date: April 20, 2010